Oracle Breaks Nasdaq Record - In a Bad Way

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Oracle Breaks Nasdaq Record - In a Bad Way

Panicky investors sold Oracle stock like it was going out of style Tuesday following a weak second-quarter earnings report.

By day's end they swapped more than 170 million shares of the company's stock, setting a new Nasdaq record. Oracle ultimately accounted for about 20 percent of the day's total Nasdaq trading activity. By closing time, its share price had tumbled by almost 30 percent, to US$22.94.

The shot that started the stampede was a financial report, released late Monday, showing a revenue increase of 23 percent over the same quarter last year - but profit grew by only 4 percent in the same period, from $179 million to $187 million. Besides, analysts said, the revenue growth was of the wrong sort, and there was not enough of it.

"Oracle's problem is that the services side of its business is growing much faster than the product side," said Greg Vogel, an analyst with Montgomery Securities. Ideally, it should be the other way around. "Services aren't nearly as profitable," Vogel said, because of labor overhead. "The most profitable part of the software business is the software itself."

The company's services business, including overhead-intensive consulting and education services, grew by 41 percent, from $705 million in the second quarter 1996 to $993 million in the second quarter this year. Database sales, by contrast, grew by only 3 percent, from $428 million in the second quarter last year to $442 million in the same period this year.

"Everyone judges stock price based on growth," Vogel said. Oracle's 23 percent growth in revenues produced an earnings increase of 6 percent, from 18 to 19 cents per share. That's growth, Vogel said, but not enough.

The company blamed its poor showing partly on volatile Asian markets. "Clearly, we were disappointed with the results this quarter," Oracle's chief financial officer Jeffrey Henley said in a prepared statement. "While several factors impacted the quarterly license growth, the economic situation in Asia-Pacific clearly had a significant impact. In addition, the strength of the dollar continued to have a dramatic effect on our reported results this quarter."

The company, which ranks second only to Microsoft in the software world, had expected far greater revenues than the $1.6 billion it brought in, and said that its management is feeling the challenge of accurately forecasting revenue and, therefore, expenses. But Oracle executives are losing credibility in some analysts' eyes.

"Oracle has been such a solid company for so long that when they've had a bad quarter, they've been able to promise better earnings next time, and we've believed," said Esther Schreiber, a Credit Suisse First Boston financial analyst for enterprise software markets.

"That's why these results were such a shock. Last quarter, when their server sales grew 6 percent, they swore 18 or 20 percent growth next time (but only produced 3 percent).... I think the market for databases is getting saturated," Schreiber said. "And Oracle is selling more of its databases through SAP and other resellers, which affects their price point and overall revenues.

"But the real disappointment was the applications," Schreiber said. They grew by 7 percent in the recently ended quarter. "If Oracle can't make it in apps, their survival in the future is in question."